Monday, March 16, 2009

Would you let your neighbor's house burn down?

I saw an excellent interview with Federal Reserve Chariman Ben Bernanke on 60 Minutes last night. Aside from being impressed with Mr. Bernanke, I think he made two very good points that seem to be lost on a lot of Americans who are so upset "our money" is being used to bailout rich people, crooks and banks that deserve to fail.

The first was a great analogy. Mr. Bernanke said in response to the idea that we should just allow these institutions to fail because they deserve to fail. I paraphrase:

What if your neighbor was smoking in bed and set his house on fire? The house is burning. Do you allow his house to burn down? He was reckless and caused his own problem. But, you live in a wooden house right next door? In fact, all the houses in your neighborhood are wooden. You call the fire department, put out the flame and worry about asigning blame and meting out punishment later."

I completely agree with the sentiment expressed by this analogy. Not being a person who is all that into punishment anyway, I struggle the concept of allowing bad things to happen to people because they "deserve it". But, setting that aside, allowing many of these institutions to fail is, as I've said earlier, cutting off your nose to spite your face. It doesn't just harm the guy who was smoking in bed, it threatens our own homes. We must do what's best for all of us regardless of what they "deserve.".

Secondly, Mr. Bernanke addressed the sentiment that we are spending tax dollars to bail out banks. As he put it, the banks have accounts with the Fed (which is the source of money-they're the guys who print it). The Fed doesn't have to borrow money to put it into their accounts. All they have to do is magically make the money by entering a few keystrokes. Now, we all know from Econ 101 that you don't want to keep doing this forever. But, in a time when banks are about to go under and there's no risk of inflation, it makes sense to me to do this. Whether you agree with that or not, it is not spending tax payers money when the Fed injects more money into the banking system. That is simply false.

15 comments:

Anonymous
said...

Brian, I couldn't disagree with you more on this one. Bernanke is one of the guilty parties in our current economic meltdown. First of all, his analogy was rather poor. Of course the way he states it , it would make sense to help your neighbor and thereby your entire neighborhood. You have nothing to lose and everything to gain (including a grateful neighbor!). The better analogy would be this. "Would everyone in the neighborhood be willing to part with $10,000 of their own money, to put the fire out for this neighbor who smokes in bed, and caused the fire out of his own stupidity?". That is closer to the truth.

Helping this "neigbhor" did not come free of cost in our economic example. Basic common sense applies here. If simply printing money, fixed problems then we would just continue to print money. We could fund all our programs and road development, schools, universal healthcare, etc by simply printing money out of "thin air". But of course, the taxpayer eventually gets stuck with this tab. Do you realize we currently have a national debt of almost $11 trillion, and we pay $1.4 billion in interest EVERY DAY. That is $1.4 billion flushed down the toilet every day, simply to pay interst on our national "credit card'. And this money we used to bail out the crooks and morons who made greedy and bad decisions, just got added to our tab. In addtion, increasing the money flow artificially causes inflation. Each dollar becomes worth less, when the Fed decides to create a few hundred billion out of thin air. I highly recommend that you read Chapter 6 of Ron Pauls book "The Revolution" for an excellent breakdown of money and Feds relation to it. You really should read both sides of this issue. CBS did a softball interview that did not show both sides of the issue.

Here is what Ron Paul said regarding the Feds ability to print money out of the air, and how it has made our foreign wars in Iraq and Afghanistan so easy to get involved in. Read this and tell me what he says doesnt make sense.

"If every American taxpayer had to submit an extra five or ten thousand dollars to the IRS this April to pay for the war, I'm quite certain it would end very quickly. The problem is that government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes. When the costs are obscured, the question of whether any war is worth it becomes distorted. Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.

Economist Lawrence Parks has explained how the creation of the Federal Reserve Bank in 1913 made possible our involvement in World War I. Without the ability to create new money, the federal government never could have afforded the enormous mobilization of men and material. Prior to that, American wars were financed through taxes and borrowing, both of which have limits. But government printing presses, at least in theory, have no limits. That's why the money supply has nearly tripled just since 1990."

PS. One additional comment I forgot to add. Where was Bernanke when this happened on his watch? AS the interview stated, he was Fed chairman since 2006, and was on the Presidents council of Economic advisors before that? This economic meltdown that has wiped out thousands of jobs and more to come, and has killed 401ks and my daughters 529 for college, wasnt a natural disaster like a tsunami. This was entirely predicatable (or should have been!) by so called economic experts. In fact, even Jon Stewart did a wonderful job recently of calling Jim Cramer to task for his network, CNBC, giving these firms a free ride, and doing no investigate work or questioning the practices of Wall st this past years. NINJA loans? ( no income ,no job), but you still get a mortgage? Its insane. How could Bernanke, Paulson and the rest of our government economists be OK with allowing banks to do this, and yet still saying we would cover them in case of default?!). All these ARM mortgages that he must have known people couldnt pay when the rates rised...and his continuing to lower the Fed rates so low that even people who normally (with natural market forces) couldnt afford a house, started to buy houses...it was a recipe for disaster. And it happened under the watch of Bernanke and Paulson. (Sure, it started back in Clintons adminstration, continued with Bush, and Greenspan shares most of the blame as well. But Bernanke did nothing to prevent it, and was caught totally unaware. He should be fired for gross incompatence)

1.) Yes, I would pay to put the fire in my neighbor's house it if it threatened my house and the whole neighborhood. I'd rather pay $10,000 to save my house than $200,000 to buy a new one.

2.) Of course, printing money isn't the answer to all of our ills and it's a gross overstatement of Bernanke's position to imply that it is. Similarly, it it's not exactly the same as taking money from taxpayers. Yes, it increases the money supply, which devalues the money. But, sometimes it's is necessary.

3.) Ron Paul (forgive me) is a nut job. While he may be brilliant in some respects, his answer to every problem is "free market" and "no government". It's like the guy was running for President of an anarchy (oxymoron intended). The free market does not make everything right again. And, government does have a role to play. Frankly, I have a hard time stomaching politicians who run on the platform that government is the source of all our problems and the cure is smaller government.

4.) I don't see the point of looking back at this particular point in time. Allowing AIG to fail because they did stupid things or not listening to Bernanke because he didn't predict the calamity does nothing to solve the problem we find ourselves in now. Yes, I'm amazed, stunned, shocked that none of the "geniuses" we have could have predicted this calamity which many of us lay people could see coming a mile away. Of course, I didn't know anything about derivatives and I knew precious little about sub-prime mortgages. But, I did know that housing prices could not increase double digits every years. I just didn't know hot they were being propped up. In any event. The time to look back and lay blame is after we have the fire put out, not while it is raging.

I think you make some valid points that show that you are not just following the crowd about this and I like that. It's what I like about your blog to begin with.

We disagree politically, but we agree just about everywhere else.

I want to stick up for Ron Paul for a moment.

It's very easy to call him a "nutjob" without any supporting evidence, but there are some facts about him that are impossible to miss.

First and foremost, he was almost alone during the Bush Administration warning of the bubble that was coming. In 2002 Doctor Paul introduced the "fair Housing Market Enhancement Act" in order to reign in Fannie Mae and Freddie Mac. He is on record time and again laying out exactly what would happen if what was going on was not addressed. They called him a "nutjob" back then too.

Now he is telling us what we don't want to hear. Spending got us into this mess, just as he described it would, and that continual spending will not get us out of it.

What was Barney Frank, and Chris Dodd, and Ben Bernanke, Turbo Tax Geithner, and Shifty Paulson telling us before the melt down?

The same thing they are telling us today. What we have before us, trying to lead us out of a mess, is the very group that enabled the mess that we are in. And what is their solution? Get the credit flowing freely again, just like it was. That way people will go out and spend spend spend money that they don't have and possibly can't repay.

If it were only Ron Paul that fore saw this, and predicted it, that would be one thing. But there was and is a whole group of economists that the media tends to ignore who warned about it and are warning us about Washington's solutions. The Austrian economists.

Would you fight your neighbor's fire by throwing gasoline on it?

That's what they are doing.

A better analogy from Bernanke would have been this:

If your neighbor is burning his house down by his falling asleep every night with a cigar in his lips, would you run to the market to get him more cigars so he can do it again? Or would you instead ask him to please quit smoking?

The way to put out the fire is bankruptcy. That's why it exists. It is there to make sure the fire does not spread. The economy doesn't lose the assets of the company, it gets absorbed into the economy in one way or another. Did the assets of Lehman Brothers or Bear Stearns disappear with their name? No, they live on among the assets of other financial institutions.

First, I don't really dismiss Ron Paul as a "nutjob". That was a pretty flip remark by me. But, he does remind me of the guy who only has a hammer as a tool. Everything looks like a nail. I think the free market is a wonderful thing. I think a "reasonably" sized government is a wonderful thing. I simply don't think the market is answer to every question.

I'm not surprised that some economists saw this coming. How could they not? As I said, little old me knew this housing thing could not continue. A couple of years ago when I saw people flipping properties in Naples, FL, sight unseen making tens of thousands of dollars in a week I got very concerned. And, common sense tells you that housing prices (and medicine prices and higher education prices) can't continue to grow at double digits every year without something breaking. Anyway....

I do agree with you here. We don't need to return to the free (stupid) credit policies that got us into this mess. But, we do need to get confidence back into the market so that those that need and deserve credit can get it. And, I think that some institutions need to be taken down in an "orderly" fashion as Bernanke put it- not a fire sale.

And, I absolutely think we need better regulation- translated- more government oversight. We have to take the cigars and the matches away from those idiots who were smoking in bed.

All analogies fall short. The point Bernanke was making was that allowing some of these institutions to fall catastrophically would be akin to a fire spreading or dominoes falling. Trying to separate what is intended to keep the institution from failing from what is intended to "rebuild" is difficult at best. And, of course, an institution must be properly capitalized (able to function) or any bailout is simply a postponement of it "burning down".

The executives at AIG should be called on the carpet and shamed. Many other executives have voluntarily turned back compensation in these times. But, a contract is a contract. Unless AIG goes bankrupt, it has an obligation to pay commitments that it made. The government seems to be trying to find ways to get the bonus money back and I'm all for any legal way of doing so. But, simply ignoring a contractual obligation is not an option, IMO.

I'm not here to defend AIG. They are despicable and need to be publicly shamed. I'm trying to make two points 1.) A contract is a contract. 2.) Sometimes we have to jump in an help someone who is not "deserving" because it serves the greater good.

We'll a number of good comments on this one! Of course, i agree 110% with what "Someday" said. When it comes to economic knowledge and foresight, Paul is light years beyond Bernanke, Paulson and the rest. Brian, I also did want to clear up one other possible misconception about Ron Paul that you bring up. I know sometimes he may come across as a "nut job", but honestly I think he is really a level headed, and gentle soul. He isn't very "slick" or much of a word-smith. But I think he's one of the last honest politicians who really, honest to God, cares about the Constitution. But I understand your concerns about those who feel that govt has no role, and agree with you. Actually though, Ron is not as anti-govt as you would think. He is primarily against the great power the FEDERAL govt has, and more for giving back State govt certain rights. I've seen a number of interviews with him, and his answer regarding a number of issues is "I want to give those powers back to the States", and he's actually completely consistent with the Constitution in that answer.

In fact along those lines, one of his most compassionate stands he has taken (which sadly, few other politicians have shown much compassion on) is on the medical marij. issue, and how California has passed laws that allow for use of that substance for pain control, and helping the appetite of suffering cancer patients. ( and I think one thing we all agree on on this blog, is that we aren't really big fans of "suffering". Be it the eternal or temporary versions;) Yet the Feds step in and try to overrule the State on that. They arrest and harass people who are suffering and in pain, even when its legal and allowed by their State and counties. Paul's honest, and compassionate stance on that issue alone, makes him more caring and real than 99% of the politicians out there. I can't believe how many politicians out there have admitted to "inhaling" with a laugh and sly smile (Clinton, Obama, Edwards, Kerry..all of have them have admitted. And no, I'm not picking on the Democrats. I only know that because I saw a video recently of a Democratic debate where Anderson cooper asked the question, and those people answered honestly. I'm sure the Repubs are no different, but probably wouldn't answer honestly), and yet these same politicians still don't have a problem with allowing the arresting and hassling of these people, for something they themselves have done. (although I must give Obama major kudos for stating he plans on stopping the DEA raids on the California clinics that provide for these patients. It's a very compassionate move).Believe me Brian...Paul is less crazy and more compassionate than most politicians out there. I hope you can reconsider your position on him, and possibly look at him in a different light.

I hear what you are saying Brian.. I think that the UAW probably agrees with you.. it is why I am okay to see GM go bankrupt.. gives management a legal way to renegotiate contracts.

This is probably what we should have let happen to AIG.. or at least given them a bankruptcy-like status to deal with contracts and the like.. by bailing them out we prevented them from having the options that bankruptcy gives them.

It is getting a bit weird these days with people saying things like "we cannot let AIG fail".. that kind of thinking will take you to some strange places.

I apologize if my remark about Ron Paul was offensive. Honestly, I characterized him based on knowing very little about the man. He does seem compassionate and I know he is a big fan of the Constitution. As you know though, just as some of my friends are leery of those whose answer to everything is "more government", I am leery of those whose answer to everything is "no government". I think there has to be a balance.

I completely agree with Paul on the medical marijuana issue and I admire his willingness to take a stand on that one. Thanks for educating me.

You're right, Bob. Bankruptcy would have given AIG a legal way to renegotiate those bonuses. I don't know enough to say whether we should have allowed them to go bankrupt or not. Bankrupt doesn't mean out of business, it simply gives a company a way to renegotiate its debts. I'm guessing the Fed thought they were too far gone for that though. Don't know.

Now, when we have this diverse a group agreeing on some pretty big issues, why the hell are we still sitting idly by while President Obama let's the Bush-appointed Bernacke continue to destroy our economy by driving us deeper into debt?